Every day my in-box contains a few more emails exhorting me to adopt ‘data and analytics’. But when I seek practical examples of what this might mean, how it would add to the quality of my work, there don’t appear to be many examples to justify the investment of time or money.
It was therefore refreshing to spend time with Dave Cohen, a Principal Client Advisor from the IBM Watson group. ‘Watson’, as some will remember, was the computer which defeated the Jeopardy game show champions. Since then, it has increasingly been deployed in major industries such as healthcare and finance to simplify data extraction and support improved diagnostics. In those instances, it is either raising the quality of patient care or the assessment of risks. Now it is moving more directly into the world of complex contracts and supply networks.
In a webinar that we conducted today, Dave offered a series of illuminating case studies. For example, from the aerospace industry we saw how analytics can substantially improve aircraft availability. Not only does this improve contract performance, but it is the sort of approach that can more generally increase the momentum towards outcome-based contracts – a direction in which many wish to go and which is shown to bring real improvement in value, but until now many have struggled to put into effect.
We also gained insight to a contract manufacturing project and ways in which more holistic data analysis can support improved buying decisions, balancing risk, reliability and price with far greater accuracy and speed. It struck me that the proactive capability of a system like Watson would also support more regular renegotiation based on shifts in market conditions – surely a major value in this era of growing volatility and change.
A third example explored analytics as a way to capture and disseminate key contract data and trends. This could be through identification of specific risks – at the level of individual contracts, or in relative terms between types of agreement, or based on the terms applying in industries, geographies or product divisions. For highly regulated industries, this capability is fast becoming mandatory. For others, it will represent a source of competitive advantage as they increase reliability and maximize savings or profitability through enhanced efficiency.
Finally, Dave described an IBM internal project to streamline development of customer proposals. Analytics is enabling rapid evaluation of the customer RFx, to ensure an optimum solution. I find this especially interesting since IACCM’s work on client value clearly indicates the importance of helping customers define their needs, rather than responding to what they think they want. A true added-value supplier assists in shaping the solution and as a result is able to operate with far greater effectiveness. This means more time is spent on continuous improvement and innovation, resulting in a much happier customer. It also means that the supplier generates far better margins from their business.
If you are still wondering why and how data analytics will impact you and your business, I recommend that you take the time to listen to this webinar. It can be accessed at https://www.iaccm.com/resources/?id=8329&src=Watson
Many in Procurement see the continued emphasis on cost reduction as good news. It seems to make their jobs secure and surely, one day, their status will also increase.
But those who have now lived through 20+ years of pressure on cost may be a little more skeptical. Indeed, Procurement itself is victim of those executive purges, with overall headcount and budgets for Procurement functions expected to reduce in the coming years.
The truth is that the only route to security is through the addition of quantifiable value – and traditional procurement savings are not in that sense a headline item. In today’s more complex world, the aggressive pursuit of savings often damages value and overall company performance. Procurement in this traditional form attracts more enemies than friends. And executives know that automation will steadily allow most purchasing decisions to be made elsewhere in the business.
Businesses are becoming ever more dependent on the quality of their trading relationships and the commercial competence with which these are structured and managed. They must achieve balance in their decision making (weighing the different needs and perspectives of multiple stakeholders). They must achieve balance also in the integration of what they sell with what they buy – so customer needs must be mirrored in their purchasing contracts.
Today, that balance is lacking in many ways because it is distorted by unbalanced measurement systems. Requirement gathering and validation is often flawed, leading to weaknesses in supplier evaluation and selection. The criteria for selection and the resulting contract terms (which then guide supplier behavior) are often misaligned with business goals. The post-award contract implementation and supplier management rely on untrained staff with quite different objectives and limited understanding of their role.
Each of these areas represents a glaring opportunity for added value. And we haven’t even touched on areas such as innovation, which is another possibility.
But it seems to me that most Procurement groups are struggling to move into these areas. In part it may be an issue of skills, but I think it is more often because top management is confused about what it really wants and the Procurement leadership team is not convincing in its arguments for change. While Procurement continues to be measured primarily on cost savings, it remains just one more stakeholder in the overall commercial process. It cannot lay claim to balanced judgment, nor to being responsible for wider business outcomes, while its measurements of success remain so limited. Other groups and functions will continue to see Procurement as reflecting an important, but narrow, interest.
Certainly, if top management wants to secure greater value from its trading partners, it should be thinking hard about changing the business dynamic. And if Procurement wants to be key to the future, it really should be pressing for changes in its role – and especially for rebalancing of the measures used to gauge its success.
Drawing once again from the National Law Journal, it has recently been announced that law school enrolments in the US are down once more. This is the fourth successive year of decline and numbers have fallen by 28% since 2010.
I tried to find statistics for other jurisdictions, but that isn’t always easy. However, a recent article in The Diplomat highlights the rapid growth China, suggesting that there are now 150,000 new lawyers graduating annually (up from about 1,000 in the 1980s). Japan has also witnessed a big increase in the number of lawyers. Public policy encouraged this growth – but only to a level of around 3,000 a year and the grand total is only just over 30,000, compared with 1.2 million registered attorneys in the United States. The Japanese government feels that there may now be too many lawyers because some are struggling to find work.
Growth continues in India, averaging about 4% per year. And in fact, in gross numbers, India has now overtaken the US, with statistics suggesting a total of around 1.3 million. I could not find data to tell me how many of these are engaged in offshore or outsourced legal and contract management centers, though the high volumes appear to be concentrated in states where such service centers are typically located.
Numbers in the UK tripled in the last 30 years, but appear now to be static. With around 150,000 lawyers in total, the numbers per head actually lag behind some European countries (Spain, Italy) and significantly exceed those in Germany and France. A significant proportion of UK lawyers work in the financial services sector, which has offered significant job opportunities in compliance and regulatory affairs.
One reason for the US student decline may well be a drop in the number of overseas students. As the US economy becomes less dominant, the need to study US law also becomes less relevant. Instead, students may stay in their home country (especially China and India) to learn within their own jurisdiction. These changes are likely to reflect in reduced dominance by common law systems and perhaps, over time, the emergence of more widely established global practices, especially in business transactions.
Mark Harris has written an excellent article in The National Law Journal (“A New Way To Manage The Mountains Of Contracts”, December 8th, 2015). He introduces his topic with the following comment: “Contracts are the most important point of interface between companies, their customers, suppliers and employees. They form the bone and connective tissue that gives the company structure and movement.”
While many may question whether contracts are the ‘most important’ point of interface (I am sure many sales reps might disagree), his point is correct that good contracts truly do offer ‘connective tissue’. Mark goes on to provide some excellent examples of why contracts are so important – and becoming more so. He also makes the key observation that what really matters is the contracting process and that in most organizations these are currently obsolescent. I would go further: I don’t believe most organizations actually have a defined contracting process, covering the full lifecycle of a contract.
This weakness creates exposure to many risks. Details like the inability to find contracts or to properly communicate obligations are actually quite minor compared with the growing frequency with which an inappropriate form of contract is used, or the terms are wrong, or post-award management is chaotic. Mark draws on an example of good practice in which a company has deployed “technology to enable the systematic capture of contract requests and information; distribute and execute work efficiently; and then track obligations, risks and performance. By applying process (including clear workflow rules based on contract risk and complexity, a dedicated contracts team designed to alleviate bottlenecks, custom playbooks) and technology innovation, Allergan is reducing risk, liberating valuable data, and capturing incremental revenue by bringing products to market faster.”
Where I diverge from Mark’s analysis is when he presents the issues as ‘legal problems’. Lawyers are key stakeholders in any contract. That does not naturally or necessarily make them owners of the contracting process. Indeed, the article acknowledges this when it says: “For years, companies have tried to solve complex legal problems with more lawyers, when the right answer is often fewer. High-volume contracts operations don’t call for a legal-only solution.” But having recognized that contracting is actually a multi-disciplinary, collaborative activity, Mark then proposes that the lawyers should be top of the pile when he says that these operations “require a combination of technology and processes that allow a pyramid of negotiators and subject-matter experts to work under a smaller pool of strategic lawyers who set policy, anticipate important risks and provide high-value counsel to their business clients.”
While I have seen well-intentioned General Counsel show invaluable leadership in having their company tackle weaknesses in contracting, I am far from convinced that a stakeholder with specific interests can ever fully represent the wider interests of the business. Indeed, I think one reason why contracting processes are so weak is precisely because individual stakeholders jealously guard their power and prevent anyone from within their number taking ownership and control. Many might argue that much of the problem with contracts today is due to the conservatism, traditional thinking and resistance to technology shown by many in the legal profession.
To be effective, a contracting process must be balanced and visibly reflecting good judgment. Its owner has to be measured on the effectiveness of its output throughout the life cycle. I do not believe this is consistent with the role or skills of most legal departments and I am unsure that it is something they should aspire to. I think true excellence in contracting process requires an independent owner – who may indeed have legal qualifications, but will not be driven by the specific measures or purpose of the in-house counsel.
A relatively high proportion of business deals or relationships fail to deliver expected results. This proportion increases in situations where there is a high degree of negotiation. For example, it is often suggested that 60 – 70% of outsourcing contracts underperform. So to what extent are contracts themselves at fault? Or alternatively, if we had better contracts, would success rates improve?
Building and managing a contract is rather like building and managing a house. Success depends on the effective coordination of a team of experts, working to a common design or plan. That design or plan must be based on a clear sense of purpose or goals. It also requires a responsible ‘owner’ at each point of its life, providing guidance and instruction and taking responsibility for ensuring the right outcomes.
In the context of a house, the property developer engages experts – architects, engineers, a builder – who in turn coordinate relevant professionals – electricians, plumbers, bricklayers, landscape gardeners. On completion, the property may be turned over to a new owner, who then assumes responsibility for ongoing repair, maintenance and improvement – once again engaging experts as needed to perform these tasks.
Things go wrong if the developer fails to ensure clarity of purpose, or if the architect fails to design for that purpose or to communicate clear instructions to the builder, or if the builder fails to coordinate and oversee the contractors ….. The list of possible problems goes on and each of them contributes to potential delays, cost overruns and disputes.
I think the analogy to a contract is clear. At the first level, the contract should be the design drawing that represents the vision of what the developer wants; it is then the model to which experts contribute their ideas and explain their limitations – areas such as finance and pricing, intellectual property, tax and intercompany, operations and project management. Failure to coordinate or reconcile these areas will cause problems – delays, overruns, disputes.
What makes contracts incrementally complicated is the fact that there is usually a stark contrast between the ‘design’ stage (contract drafting, negotiation) and the ‘build’ stage (performance after signature). It is often the case that the people charged with performance had little involvement with the design. Indeed, they are rarely even given the opportunity to review the signed agreement and confirm their readiness or ability to perform against it. And those who undertook design are rarely held to account for whether their work supported a successful outcome.
In situations which use a standard form of contract to undertake a regular set of tasks, problems are of course rare. The issues arise when the activities being committed are not standard, or are customized. Then, the contracting process becomes fundamental in determining the value of the outcome because it provides the discipline that ensures clarity of purpose, stakeholder engagement, reconciliation of differences or variations and a tool for guiding and overseeing performance. The absence of that discipline is rather like constructing a house with only vague concepts of what purpose it is to serve and without structured drawings or plans.
So poor contracts do lie at the root of many underperforming deals and relationships. However, the poor contract is a direct result of failure to ensure a robust contracting process, with clear ownership and accountability for defining requirements and producing agreements that deliver desired results.
There is growing momentum for fundamental change in the way that trading relationships are formed and managed. It is increasingly clear that the way businesses approach selection, engagement and management of their trading partners results in too many failures.
The news stories indicating these problems appear on an almost daily basis. Earlier this week, the UK’s powerful Public Accounts Committee was back on the warpath with regard to Government procurement. They were once again promoting various remedies to the perceived ills of major contracts and value for money. Their solutions include increased use of SMEs and enforcement of open book accounting.
I will comment in greater detail on these specific proposals in a subsequent blog. However, regardless of their merit, I think we have a much bigger problem.
Network technologies will continue to transform ‘the nature of the firm’. It is time for a new Ronald Coase to emerge and define the business model of the 21st century – because it is this that determines the means of supply and the consequent need for trading relationships and how they are formed and managed.
Right now, I think we leap from one quick fix to another – picking on symptoms, not causes. We had compliance, we had category management, we had more adversarial allocations of risk, we had spend aggregation. Now we have a push to shorter term contracts and disaggregation to encourage SMEs and the growth of competition. But not surprisingly, these initiatives provide little improvement. The need is to redefine the environment within which trading relationships are formed and to design commercial and contracting models that support it. Already IACCM research is pointing to many of those answers – things like relational contracting, outcome-based structures, the need to shift the role and purpose of traditional contracts, commercial, legal and procurement groups.
Drawing on all the evidence, IACCM is preparing a definitive view of how we prepare for and build this future. You are welcome to join us, or to share your views of how trading relationship management should be redefined.
Michael Casey wrote an excellent comment on one of my recent blogs about contract and commercial skills. He observed that many practitioners tend to believe (or at least portray) that they ‘know it all’. And in Michael’s experience, they do not. He asked whether there is any data regarding the benefits of training.
I strongly agree with the point Michael makes – and indeed the issue he highlights lies at the heart of IACCM’s reason for existence. Like so many, I ‘stumbled’ into contract / commercial management and found a group of well-meaning, often talented, individual practitioners, but with no consistency of training and in many cases little consistency in their perception of the role to be performed. Within customer organizations, the contracts / commercial discipline was generally absent (outside their law department) and – as Michael observes – in many geographies contracts were either seen as culturally alien or purely administrative.
IACCM was formed to change that environment. It is 10 years since we developed the first unified ‘body of knowledge’ for the community and there have been some 12,000 practitioners enrolled into that program. That remains the tip of an iceberg, but it is an important start. Unfortunately, those who are most resistant to ‘professionalization’ and standards of practice are often the ‘leaders’ of the function. Either because they feel no personal need, or perhaps feel threatened by the idea of consistent training, there is frequently denial of benefit from consistent knowledge, practices and certified competence.
It is this attitude which ultimately undermines the growth or status of the function. As an example just this week, I heard from the CEO of a large, international company who observed “I am told that the people in my commercial department work really hard, but I have no idea what they do”. In these challenging economic times, you can imagine that is not a good way to be viewed – but it is inevitable while we remain scattered individuals without a professional standing or ethos and without reliable data that demonstrates the value that we bring.